ARA taps onshore RMB capital to invest up to $700m in China

Singapore-headquartered investment manager ARA Asset Management is tapping the vast pools of domestic Chinese capital with its latest onshore real estate investment strategy.

Alvin Loo, ARA’s head of China, told PERE the firm is looking to invest up to RMB 5 billion ($723m; €648m) before the end of 2019 in China on a deal by deal basis. This is understood to be the first time the manager is raising RMB capital from mainland Chinese institutions for domestic real estate investment. Loo says the firm has two to three deals in the pipeline to put some of this capital to work.

Last week, the first of these partnerships was announced— a 50:50 joint venture with the Beijing-headquartered investment manager CICC Capital to purchase a commercial mall in Chengdu, one of China’s fastest growing cities in the southwestern part of the country, according to a filing on the Singapore stock exchange. PERE has learned that the total size of the joint venture is RMB 800 million in equity. The deal has an LTV ratio of 50 percent. Out of this RMB 800 million, 50 percent was raised by ARA from two undisclosed investors. The remaining 50 percent was raised from a fund managed by CICC Capital called CICC Qihang Fund. This RMB 400 million fund includes a RMB 200 million commitment from a Chinese subsidiary of the Singapore-listed Metro Holdings. ARA will be the asset manager for the joint venture.

Founded in 2017, CICC Capital is the private equity arm of the investment bank China International Capital Corporation (CICC). It has aggregate assets under management of about RMB 300 billion, according to the filling.

“From our perspective, CICC is one of the premium financial institutions in China, and they can help us with monetization and exit strategies, including REITs and CMBS in China. And at the same time, they have a very strong relationship with local governments,” said Loo.

This is the first time ARA is launching an onshore product in China and it is also its first time partnering with a Chinese investor since it acquired the Century Link commercial complex in Shanghai with Beijing-based insurer China Life Insurance for RMB 20 billion in 2016.

ARA’s decision to raise institutional RMB capital is partly driven by the pent-up liquidity in China due to ongoing regulatory restrictions on capital outflows.

“We would like to tap the huge amount of RMB capital onshore. Some of this capital they do have restrictions on going offshore, and this pool of money is huge. It is a new source of investors’ capital for ARA,” said Loo, explaining why the manager is looking to foray into the onshore fundraising market in China.

According to a recent report by the real estate services firm Cushman & Wakefield, 65 percent of 51 Chinese respondents participating in a survey said they were “significantly or severely impacted by capital controls” when making outbound investments.  Indeed, outbound real estate investments by Chinese companies dropped 63 percent from 2017 to $15.7 billion in 2018, according to the report.

In addition to opening a new source of capital, these onshore vehicles will also allow ARA to exploit opportunities in so-called 1.5 or lower-tier cities. Currently, the company’s offshore investment vehicles, including separately managed accounts and discretionary funds that are USD-denominated and raised from foreign investors, only invest in Tier 1 cities like Beijing and Shanghai since foreign investors are more familiar with these gateway cities. The establishment of an onshore platform is being seen as a complementary strategy to the offshore vehicles to expand the firm’s footprint in Asia.

The firm is currently also understood to be fundraising for ARA Real Estate Partners Asia II, a pan-Asia value-add vehicle, that will be partially invested in China. ARA has also been a long-term China partner for the US pension California Public Employees’ Retirement System.

“We see there is a lot of prospect and potential in the cities like Chengdu, Hangzhou, Wuhan and the cities in the Greater Bay Area,” said Loo. “A lot of the onshore capital, the investors understand China better and they are more willing to go into the fast-growing second tier cities.”